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John Chatfeild-Roberts: Here we go again on Greece

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Greece. There is a subject we have not discussed for a while, after not being able to get away from it a year ago. Over that period, it seems like the country’s underlying problems have proved stubbornly difficult to solve. This was not entirely unexpected. Indeed, in a report last July, after Greece’s bail-out had finally been agreed following months of acrimonious negotiation, political brinkmanship and a bad-tempered plebiscite, we wrote: “If the immediate insolvency problem has abated, Greece’s deep-rooted structural financial and economic problems are very far from resolved; we may have to revisit this enduring subject”. Well, here we go again.

Greece is due to repay €3.5bn of its €86bn bail-out debt this July and, just like last year, is not in any position to do so. The difference this time is that there is an added frisson of toxicity and potential collateral damage to the situation: Greece sits at the epicentre of the ongoing Middle Eastern-European migration crisis. This is a thorny and seemingly intractable issue itself, with debates about effective border controls and movement of people.

What is more, the failure to address fundamental structural, economic, financial and social reform – despite firm instructions and hefty financial help from the European Union, the European Central Bank and the International Monetary Fund – raises all the old questions about Greece being ejected from the euro.

For the eurozone, this comes to a head at the worst possible time, with the UK voting in its in/out referendum on EU membership in just a few weeks. These troubles are a gift to the “leave” campaign, so we should expect the eurocracy to try and mitigate against the potential risks, if only to keep the Grexit/Brexit combination out of the headlines.

On the Brexit front, the outcome of the UK’s vote continues to be unpredictable, although markets and bookmakers alike seem to think a victory for “remain” is on the cards. The Government-led remain campaign intends to succeed. Battalions from across the political, regulatory, business and economic spectrum assault us daily with dire warnings of Armageddon if we leave. However, in the name of balance – because a full and even-handed national debate on these issues is important – it has been refreshing to see home secretary and “reluctant remainer” Theresa May and former HSBC Group chief executive Michael Geoghegan say there is a good life still to be had outside Europe.

Elsewhere in markets…

On the monetary policy front, it was no surprise to see the US Federal Reserve did not raise interest rates at its April meeting. Fed chairman Janet Yellen commented that concerns over the global economy are abating (despite an anaemic quarterly economic growth rate reported for the US), which leaves the door open for a further interest rate rise later this year. Across the Pacific, and despite much anticipation of it wielding a “financial bazooka” in order to temper the strength of the yen, which is hampering the recovery of the Japanese economy, the outcome of the Bank of Japan’s recent policy meeting was nugatory.

Meanwhile, Brent Crude is $48 per barrel, which is 71 per cent above its January low, but still 60 per cent below the mid-2014 levels before it cracked.  Interestingly, this price rise has come despite the failed talks in Doha among the world’s key producers aimed at curtailing production to help prices. The problem with the meeting was that the Iranians failed to turn up and Saudi Arabia was never going to restrict production and risk losing market share without Iran agreeing to do the same. While consumption is growing with global GDP and production is flat traders have felt more confident in pushing prices up, even though global inventories remain high. This has brought welcome relief to hard-pressed oil producing companies and countries.  However, rising crude prices are feeding through to the refined products we all consume and – just as the oil price crash fed a disinflationary trend – there will inevitably be some economic inflationary pressure as a result.

John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team


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